Crypto crash: Bitcoin & seven questions to understand what is happening in the market

After a series of events, more than $200 billion was lost to the digital economy

The financial market is currently experiencing moments of extremely high volatility. To the fears of a new rate hike by the Fed, which triggered the collapse of the main Wall Street indices, especially of actions related to the technology segment, is added the implosion in the prices of cryptocurrencies, dragged by the crash of the crypto Terra USD, which was the third in market capitalization and whose price went from US$ 100 to $0.47 in a few days.

What are stablecoins?
To avoid the price volatility associated with the world of cryptocurrencies, stablecoins were created. These are tokens that are associated with the value of an asset in the traditional financial world that can be considered safer, such as “fiat” currencies (such as the dollar or the euro), material assets such as gold or real estate, or another cryptocurrency. .

There are also ‘stablecoins’ that are not associated with any other currency but are controlled by algorithms to maintain a stable price.

What happened to Terra USD?
Unlike other stablecoins that have collateral from the physical world behind, such as DAI or Ether, which are backed by the dollar, the Terra project was based on an algorithmic collateral, which was responsible for maintaining the parity of its price and that of US currency. This was an aspirational one in the crypto world: a coin that did not need backing outside the blockchain network to operate and guarantee returns.

The operation is somewhat complex. Anyone who has 1 UST can immediately exchange it for the number of Luna cryptocurrencies that are necessary to obtain a value identical to that of a dollar.

If at any point UST is worth less than $1, holders of this stablecoin have an incentive to buy it cheap, turn around, and exchange it for the equivalent of $1 worth of Luna. Conversely, if at any point TerraUSD were to trade above $1, the incentives line up for traders to buy Luna, trade it for the stablecoin, and then sell UST for more than $1.

The fear in the markets after the latest Federal Reserve rate hike increased volatility and negatively affected the prices of other more “traditional” cryptocurrencies, such as Bitcoin, which in turn functioned as collateral for this stablecoin. In this way, many UST holders went out to sell massively, after this crypto lost its reference value with the dollar.

This had already happened some time ago, but parity had quickly been recovered. Instead, this time the imbalance was extended over time and although the creators of Luna managed to sustain the drop at 0.9 dollars per coin for a while, then an unstoppable price drop began.

In a few hours, TerraUSD, the third largest in the market, saw its value fall almost 80%, reaching less than 30 cents per dollar and then recovering to 62 cents, while Tether, the most used, fell slightly to 97 cents on the dollar.

Can losses be calculated?
The general fall in the cryptocurrency market produced a drop of more than US $ 200 billion in its capitalization in the last 24 hours, according to the Bloomberg news agency and the CoinMarketCap portal.

For its part, bitcoin, the most used cryptocurrency in the world, fell 11.3% in the last 24 hours and stood at around US$ 28,000, reaching values below US$ 27,000 at times, erasing almost a year of earnings and reaching the lowest level since December 2020. Its historical maximum was 68,000 dollars.

It is that the co-founder of TerraUSD, the South Korean Do Kwon, unsuccessfully tried to stabilize the fall by resorting and went out to sell his bitcoin reserves, which further pushed the price down.

Is it the end of stablecoins?

The market now looks with distrust at this type of project. In the midst of the tsunami, Tether (USDT), the world’s largest stablecoin, also broke its parity of 1 dollar on Thursday in a new day of panic in the cryptocurrency sector. The token has sunk as low as 0.98 cents.

With a market value of about $84 billion, Tether is an essential cog for the array of crypto trades taking place in the market at any given time. It is the most traded cryptocurrency by far, with more than double the volume of second-place bitcoin in the last 24 hours at $178 billion.

Meanwhile, while USDT tries to recover and reach the value of USD 1 again, the stablecoin developed by Circle USD coin (USDC) had a slight upward movement and trades for the first time in twelve months slightly above one dollar.